Pushing the Community Reinvestment Act into Uncharted Territory

A handful of communities are putting CRA funds toward more than just housing projects.

A health clinic in the San Francisco Bay Area. A transit-oriented development in Denver. A mixed-use plan in a run-down neighborhood in Dallas. When it comes to how these places and a handful of others view and leverage the Community Reinvestment Act (CRA), they are breaking through old barriers.

All of which brings a measure of satisfaction to Bob McNulty, longtime community development activist and president of Partners for Livable Communities. These are exactly the sort of CRA-funded projects that he would like to see take root all across the country.

For years, however, it’s been a challenge to move the key players in any CRA deal -- banks, regulators and community development advocates -- in new directions. The reason gets down to a basic tenet of the CRA: The program, aimed at low- and moderate-income neighborhoods, is rooted in housing. As a result, there has been resistance and a good deal of caution when it comes to thinking about investing in new and different things.

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Part of that resistance revolves around an active game of finger-pointing. Banks say that regulators aren’t willing to be open-minded about different types of investment, so they’re stuck in the housing box. Regulators say they are more than willing to work with banks on testing new investment strategies aimed at low- and moderate-income neighborhoods, but that the banks are evincing a chronic failure of imagination. Community development activists complain that regulators are, in general, going way too easy on banks when it comes to crediting them for “CRA-worthy investments.” There is, the activists say, chronic grade inflation.

McNulty describes it succinctly as a “conspiracy of caution,” where bankers and regulators have settled into a comfortable routine of business as usual. Bankers don’t have to think very hard about new ways to invest in communities. Regulators can cruise along in their comfort zone of monitoring straightforward home loans and housing projects.

There is no doubt that when the CRA was passed, it was aimed primarily at housing. The impetus for it was a disturbing pattern of active disinvestment by banks in low-income and minority areas around the country, particularly with mortgages but also in the area of small business loans. Called “redlining” -- because it appeared that banks were drawing red lines around population centers where they considered residents to be bad bets for loans -- the practice finally got the attention of the U.S. Senate Banking Committee in the mid-1970s.

At that time, a two-year Banking Committee study found a clear pattern of redlining nationally. Just over 10 percent of money deposited in Brooklyn banks was actually reinvested in the community. Only 10 percent of deposits in Washington, D.C., were reinvested there, with similar ratios turning up in key cities like Cleveland, Indianapolis, Los Angeles and St. Louis. By then, Congress had apparently seen enough, and, over the strong protests of those in high finance, it passed the Community Reinvestment Act of 1977.

Under the new law, banks were being asked to redirect a portion of their lending capital to low- and medium-income areas within a defined geographical range covered by the bank. Regulators would, in turn, do regular reviews of bank lending practices to gauge compliance. There has long been a debate about what sort of investments the CRA should focus on and which ones pass muster. Today, there’s an additional debate about “geography” and “banking.” There’s a new world of Internet finance and spinoff financial institutions. Some of these financial entities aren’t technically banks, but they are key to homeownership and other housing projects.

Under the CRA there aren’t any fines or other direct penalties for failure to measure up. But a bank’s ranking -- either “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance” -- determines whether or not it will win approvals from federal regulators for such key business moves as adding a branch or proceeding with a merger.

For years, some community development activists, like McNulty, have been arguing that bankers and regulators ought to think more holistically about investing in low- and moderate-income areas. That is, there’s more to a community than just housing, that a community’s economic welfare is directly affected by creating more livable places generally and helping build a healthy, educated and prosperous populace specifically. It appears that those who are pushing for that more sweeping view are starting to gain traction.

“There’s some movement in getting out of the affordable housing box,” says Ellen Seidman, a senior fellow at the Urban Institute, who focuses on housing finance and community development. The perception, she adds, has been that regulators “don’t have a lot of creativity or imagination and that lenders didn’t want to take risks.” In order to break the chicken-and-egg cycle, “You need chicken, eggs and farmers,” she says.

As it turns out, one of those farmers is a fed. Elizabeth Sobel Blum, senior community development adviser with the Federal Reserve Bank of Dallas, is a proponent of a growing movement for a much broader view of CRA investment. Writing in a recent federal reserve paper aimed at CRA compliance officers, she called for a “healthy communities framework” that “involves creating an environment in which there is an abundance of healthy choices.” She notes that there aren’t any “right answers” when it comes to evaluating a bank’s compliance, but she wouldn’t mind seeing banks credited for more than just helping with housing or small business development.

Other feds appear to be joining the chorus. “We do try to promote creativity,” says Paul Kaboth, vice president for community development at the Cleveland Federal Reserve. His shop is actively working with banks to think more broadly about things like skills training, social services, counseling and day care. “You don’t look at it as just housing or small business loans as much as what you’re providing to low- and moderate-income individuals,” he says. The rub, he suggests, is not so much bankers’ resistance to new ideas as their basic conservatism.

Nonetheless, some major financial players like Wells Fargo, Goldman Sachs and FirstBank are getting into the CRA game. As they do, there are adjustments that bankers need to make. CRA is different than the usual deal-making. “Lots of players have to be involved,” says Rob Chaney, who oversees loan operations for FirstBank in Lakewood, Colo., “and someone has to be the champion. There’s a great need for someone to beat the square peg into the round hole.”

As to state and local government, Chaney sees a potential role for the public sector to work in concert with community development organizations. Together, they could come up with more sophisticated investment options for a wide range of issues facing communities beyond housing. In that regard, community activists may have to step up their game. By way of example, he points to the issue of food deserts -- the lack of fresh food or supermarkets in low-income neighborhoods. “The tendency,” he says, “is to just throw money at the problem versus asking if there’s a sustainable business model that we can help build that gets businesses to come in and invest, and that has community involvement and engagement to prove that people are really interested in solving these issues over the long term.” The target community itself has to mobilize for banks to have confidence in a deal, he notes.

Indeed, the most successful initiatives are the ones where the community is involved from the start. “When I look at successful community development projects,” says Karl Zavitkovsky, who heads up Dallas’ Office of Economic Development, “it’s important to have community buy-in and it’s important to have a willing financial institution. You can do things in a physical sense, but if the community isn’t aware of the new clinic or new school or retail center, it just doesn’t work as well.”

Acting as a convener is one very important role the city can play, Zavitkovsky points out. But cities can do a lot more than simply be a meeting site for principals. Cities can help assemble viable parcels for development, put up city money to sweeten a given deal and perhaps help convince financiers that a city is willing to be a real partner in a project.

For example, Dallas just cut the ribbon on a project that is located next to a light rail line station and is across the street from a VA Hospital, which employs 4,000 people and generates a huge volume of patient traffic. Despite the location, there’s never been much there in terms of services or livable housing. Local community groups, banks and developers came together to focus attention and investment on the area. For its part, the city bought the land, tore down some “hot sheet” hotels and swung some tax increment financing to help underwrite debt service on a U.S. Housing and Urban Development loan.

The new mixed-use project, Lancaster Urban Village, boasts an 18,000-square-foot development of retail shops along with a couple hundred apartments -- a mix of market rate and affordable that made the project CRA-worthy. The project is in a section of Dallas that represents half the city’s geographical area but that only delivers 15 percent of the city’s tax base. That factor alone made the project important from a broad economic development standpoint. And, yes, to be CRA-worthy, such projects have to occur in a low- to moderate-income area, “but when you’re looking to be successful in a neighborhood, it’s really important to have a holistic approach,” Zavitkovsky says.

For banks, that low- to moderate-income test should be as much of a focus as the type of project being funded, says the Cleveland Fed’s Kaboth. “The worst possible outcome for a bank’s CRA officer,” he says, “is you go to your oversight committee and say we should do these loans in these Census areas and there’s reluctance because they’re not sure they’ll get CRA credits.” That’s why he is happy discussing potential projects beforehand, although banks still need to understand that the proof will be in the finished pudding.

Given the success of several alternative and mixed-use projects involving the CRA, it’s clear that there are bankers and regulators ready to disrupt the tradition of caution and move into previously uncharted territory. At that, though, the best projects are still the ones that make business sense, something on which regulators and bankers can certainly agree. “It has to make sense from a business standpoint,” says FirstBank’s Chaney. “It can’t just be about the warm and fuzzy.”